Planning for COREP. Time s ticking - are you ready?

Planning for COREP Time s ticking - are you ready?

www.frsglobal.com Introduction The new Basel III regime has been on the horizon for financial institutions since the Basel Committee on Banking Supervision first published its paper entitled Basel III: A global framework for more resilient banks and banking systems, in December 2010, as a reaction to the 2007-2008 financial crisis. Although initially revised in June 2011, regulators around the world have been refining their regulatory regimes to introduce the new regime, which covers new standards for capital, liquidity and leverage, in accordance with the Basel Committee s timeline, starting in 2013.

COREP Requirements - Are You Ready? The COREP requirements Institutions regulated by the FSA have become comfortable with the FSA s approach of trying to provide sufficient notice, clarity and certainty pertaining to the timing and content of new regulatory and reporting regimes. The European Union adoption of the Basel III standards is to be mandated through the Capital Requirements Directive, revisions III and IV (CRD IV), and the Capital Requirements Regulations (CRR). The CRD IV and the CRR documents are still being negotiated at the European Parliament although there is strong support to finalise the legislation before the end of this year. In parallel to this, the European Banking Authority (EBA) has been developing and consulting on the Binding Technical Standards and Implementing Technical Standards (ITS). The EBA held an event on 13 September 2012, to provide an industry update regarding its progress on the development of the ITS, the Common Reporting Framework (COREP), the Financial Reporting Framework (FINREP) and the supporting Data Point Model (DPM), in which Wolters Kluwer Financial Services FRSGlobal participated. What is the UK COREP timeline? In the UK, institutions regulated by the FSA have become comfortable with the FSA s approach of trying to provide sufficient notice, clarity and certainty pertaining to the timing and content of new regulatory and reporting regimes usually 12 months notice. As such, the event on 13 September 2012 could be interpreted as falling below expectations since no real, meaningful update was provided that would help an institution to plan with certainty around important milestone dates. Instead, with respect to COREP, the EBA presented three possible phased introductions emphasising that the current templates were still draft and subject to change, as are the ITS and DPM, since they can only be finalised when the European Parliament has agreed the final CRD IV and CRR text. UK COREP Nov 2011 Dec 2012 Feb Apr European Parliament and EBA May June July Aug Sept Oct Nov Dec Feb Apr May June July Aug Sept Oct Nov Dec 2013 2014 Feb 20.12.2011 CP50 & ITS 13.02.2012 CP51 & ITS 29.12.2012 - Template updates (COREP, IP losses, LE & FINREP CRD IV & CRR Finalised? 01.01.2013 Scenario 1 30.06.2013 Scenario 2 31.12.2013 Scenario 3 FSA 01.07.2013 to 30.09.2013 FSA First COREP Reporting 11.11.2013 First FSA Submission 3

www.frsglobal.com So what does this all mean? EBA SCENARIOS Scenario 1 CRR Application 01.01.2013 Q1 2013 CA Q2 2013 CR SA, CR IRB, CR GB, MKR, OPR, LE Q4 2014 GS, SEC Details, OPR Details, IP Losses Scenario 2 CRR Application 30.06.2013 Q2 2013 CA, CR SA, CR IRB, CR GB, MKR, OPR, LE Q4 2014 GS, SEC Details, OPR Details, IP Losses Scenario 3 CRR Application 31.12.2013 All reports referenced under Scenario 1 and 2 apply effective at 31.12.2013 One conclusion is that the FSA is being driven by the EBA which itself is dependent on the European Parliament as are all EU Member States. On that basis gone are the days where UK regulated financial institutions could expect 12 months notice to comply with specific, significant changes. To its credit, the FSA saw this coming and released a statement on 1 August 2012 announcing that it will be ready to start collecting data under the COREP framework from 1 July 2013 subject to the legislation and related items being finalised by this date. This could create a vacuum for UK regulated institutions should the CRR come into effect on 1 2013 scenario 1 presented by the EBA. That said, the announcement by the FSA seems to be aligning itself with scenario 2 wherein the UK Treasury provides a safe-harbour for UK reporting institutions during the vacuum, although this has yet to be confirmed in writing. However, for those UK institutions that need to comply with group reporting to other EU regulators, the vacuum may just be an illusion. Planning considerations As a result of the EBA event, what we do know is COREP is going to become a reality before FINREP which is already delayed until 2014. In the UK, FINREP could be pushed even further out based on the FSA s current stance which views FINREP as an accounting change through the back-door. Returning to COREP, we still don t know when and what the final reporting requirements will be. In this context how should a financial institution plan? Should it plan for the worst and hope for the best? If planning around the FSA s announcement on 1 August 2012, then prudent questions to ask would include: 1 How long do I have to update my reporting framework? 2 When do I need to start my project and parallel run? 3 How long did it take to plan and implement the last big regulatory reporting change e.g. the FSA Liquidity Reporting regime? 4 Can I build and maintain a solution or should I seek a strategic partner? 5 What type of resources do I need and do I have them in-house? Depicted below is a timeline with the typical stages of a regulatory reporting project (whether an internal build or vendor provided solution). Oct 2012 Nov Dec 2013 Feb Apr May June July Business Requirements Design Build Test Parallel Run Go Live Typical Stages of a Regulatory Reporting Project 4

COREP Requirements - Are You Ready? However, the reality of the uncertainty described means that many of these streams will overlap and run in parallel, which requires greater management oversight and strong project governance and control frameworks. This timeline would fit neatly into scenario 2 described by the EBA in its workshop on the 13 September 2012, and therefore also scenario 3, but would not satisfy scenario 1. So further prudent questions to be asking now are: Where is my institution on this timeline? Is there a solution to this uncertainty? How can I protect my institution against compliance risk? These include those that are known (Basel III / CRD IV) and those unknown (e.g. Basel IV a name already applied to the Basel Committee paper which looked at a Fundamental Review of the Trading Book rules). What is best practice for managing compliance risk? Best practice suggests that if you manage your data and calculations (input and output) at its most granular level e.g. the financial contract level, then this enables two important requirements of a solution - accuracy and flexibility. Accuracy is obvious; Basel III is increasing the cost of capital, liquidity and leverage, making it harder for financial institutions to make the returns on equity they became used to pre-crisis. Flexibility however is just as crucial since the burden of regulation for the sector is increasing. It is becoming more complex and has a one-size fits all framework which means the (large) mistakes of a few in the past become the burden of all in the future. As such, any solution needs to be able to meet the expected COREP requirements while at the same time be flexible enough to cope with anticipated updates to the COREP framework during the bedding down period. These could be up to quarterly, with the possibility to of having to deliver weekly or even daily reporting to the local regulator during a stress period/event. By managing data and calculations at its most granular level, new reporting requirements (regulatory or internal) become a question of developing updates to static data used to facilitate multi-dimensional reporting rather than developing new calculations and trying to procure additional data elements from back-office systems. Take for example the transition from FSA004 to CR SA. An institution which built its FSA reporting solution for the reporting requirement - up to 90 cells - will be impacted far greater as a result of COREP - where there is potentially over 6,000 cells across all CR SA templates - than an institution that embraced the principals of granularity and flexibility when the FSA first introduced the Integrated Regulatory Reporting (IRR) framework. Why is that? To accurately calculate the capital requirement under the standardised approach for any exposure class financial institutions should already be calculating all the intermediary calculations that are being requested to be reported in the column items of the CR SA template in fact this should be done at an even lower level of granularity, since some of the column items are still aggregations. 5

www.frsglobal.com We partner with all types of financial institutions This is however only part of the story. There is also the requirement to ensure form and cross form validation of the COREP returns and then to submit all COREP returns using XBRL. The reality of the market is that for every institution that embraced the principals described above when the IRR was introduced, there are far more that just saw the IRR as another compliance cost. These typically took a more pragmatic approach to solving the problem, for example, using spread-sheets to bring together back-office, financial and accounting information which probably just about worked under the current regime, but will fall well short under a COREP regime. For those institutions that developed more sophisticated solutions, were the principals described above fully embraced? If not then, many man-hours will be required to recode solutions, isolate intermediary calculations and make them available to be written back to a database, which will increase the through-put as well as the footprint of both the application and database. Can this realistically be achieved in time? Financial institutions could spend 15-18 days every quarter (and even more man-days) pulling together the data and calculations required to generate regulatory returns. Alternatively, they can implement a straight-through processing solution which is cheaper to run and will produce less errors, freeing resources (and capital) for value creation. The good news is that Wolters Kluwer Financial Services partner with all types of financial institutions to assist with ever changing regulatory reporting requirements. Built on our data solution, which provides a holistic, integrated approach to risk management, Wolters Kluwer Financial Services was able to publish COREP data requirements to its customers in May 2012 and deliver automated calculations and returns based on the then current COREP templates in August 2012, putting them well ahead of any timeline described by the EBA or FSA. 6

COREP Requirements - Are You Ready? UK COREP and Wolters Kluwer Financial Services FRSGlobal s Nov 2011 Dec 2012 Feb Apr May June July Aug Sept Oct Nov Dec Feb Apr May June July Aug Sept Oct Nov Dec Feb 2013 2014 European Parliament and EBA 20.12.2011 CP50 & ITS 13.02.2012 CP51 & ITS 29.12.2012 - Template updates (COREP, IP losses, LE & FINREP CRD IV & CRR Finalised? 01.01.2013 Scenario 1 30.06.2013 Scenario 2 31.12.2013 Scenario 3 FSA 01.07.2013 to 30.09.2013 FSA First COREP Reporting 11.11.2013 First FSA Submission FRSGlobal 07.05.2012 - COREP Software Release A 10.05.12 - Basel III Interfacing Guide and Dada Dictionary published to customers 20.07.2012 COREP Software Release B 31.10.2012 COREP Software Release C Scheduled quarterly released as per published roadmap, incorporating anticipated quarterly revisions to be published by the EBA FRSGlobal RELEASES COREP Software Release A All COREP reports available CR Calculations & Templates Fully Automated COREP Software Release B All COREP reports available Only LCR, NSFR and LR Calculation & Reports Not Fully Automated COREP Software Release C All Revised COREP reports available All Calculations & Reports Fully Automated Since then, on 29 August 2012, the EBA announced significant changes to the draft COREP templates, which Wolters Kluwer Financial Services is analysing and will deliver into an already scheduled release of the Regulatory Reporting solution on 31 October 2012, without any additional data requirements. With over 400 domain experts and over 250 live COREP implementations in Europe, Wolters Kluwer Financial Services guarantee to keep calculations, reporting, validations and submissions up-to-date. This includes draft COREP developments as well as the final EBA requirements, so institutions can better manage the transition and knowledge transfer. With over 20 years experience in developing, delivering and maintaining local and global solutions our knowledge is embedded into our solution and people making us the number one choice for regulatory reporting. With over 400 domain experts and over 250 live COREP implementations in Europe, Wolters Kluwer Financial Services guarantee to keep calculations, reporting, validations and submissions up-to-date. 7

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